Wesfarmers Outlines Coles Restructuring Plans

Australian conglomerate Wesfarmers on Thursday outlined its restructuring plans for takeover target retailer Coles Group, planning to create three new business divisions and targeting supermarket store sales growth of 3% - 3.5%.

But investors were disappointed with the plans, sending its shares down 4.8% compared with 1.8% before the statement.

Wesfarmers said it planned to invest A$5 billion (US$4.1 billion) in Coles over five years, in line with market expectations, and flagged additional cost savings for the retailer.

For the troubled supermarkets division, Wesfarmers said it targeted same-store sales growth of 3.0% - 3.5%, in line with the market average, by 2009/10, which would be a gradual improvement from Coles' recent near-flat result.

The Perth-based company, with interests ranging from insurance and home improvement to coal, also reported a 9.6% drop in net profit in the year to June 30, in line with forecasts, hit by lower coal production and prices.

Wesfarmers last week offered to improve the terms of its scrip-heavy A$18 billion (US$14.7 billion) bid for retailer Coles, giving shareholders the option of a higher cash component, after the deal fell in value.

In a detailed release, it said it planned to create three new businesses to integrate Coles into Wesfarmers.

The divisions will be food, liquor and convenience stores; big box retailing, including its Bunnings hardware chain and Officeworks office supplies chain; and discount chain Target.

Wesfarmers said it would review options for Coles' Kmart discount chain, including the sale of all or part of the business.

It forecast corporate overhead cost-savings of A$385 million a year by late 2008/09 for Coles, and supply cost savings of A$540 million a year by 2013.

"Target and Officeworks will be value accretive from the date of acquisition and we see substantial value creation in the food, liquor and convenience businesses in the medium term," said Wesfarmers Chief Executive Richard Goyder.

Wesfarmers shares have dropped sharply from a record high of A$45.73 on June 29, before the company announced the Coles takeover on July 2, as anxiety grew about its ability to turn around the struggling supermarkets operator.

The decline has pulled down the value of the Coles offer to around A$18 billion, or A$15.44 a share, compared with A$21 billion, or A$17.25 a share, when the offer was first unveiled.

Coles shareholders will vote on the takeover on Oct. 25.

Separately, Wesfarmers said its net profit in the year to June 30 fell to A$786.3 million (US$644.5 million) from A$869.4 million before one-off items.

Analysts expected a net profit of A$786 million, including gains on the sale of some Bunnings hardware store outlets, according to a Reuters Estimates survey of 10 brokers.

Wesfarmers said its profit included a A$26.5 million gain on the sale of some Bunnings outlets. Profits at its coal division profit fell 41.5% as costs rose and volumes and prices fell, while Bunnings' earnings before one-offs rose 16.1%.